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Simplifying Student Loans: New Update

The debate over simplifying student loans is back in the news again, with the expected counter-proposal to the Obama administration’s plan to eliminate the FFEL guaranteed loan program.

On July 7, a coalition of 32 private and nonprofit lenders, loan servicers, and guaranty agencies released their recommendation for simplifying the federal student loan process. Predictably, the alternative plan includes suggestions that attempt to meet the administration halfway, such as financing all federal student loans with U.S. Treasury money, but also tries to retain the opportunity for non-federal-government lenders and loan servicers to originate the loans. The alternative plan coalition argues that this combination of ideas will stabilize student loan funding but also preserve consumer freedom by giving schools and students a range of competing lender and servicers to choose from.

Unless I am not understanding the proposal correctly, it sounds as though this coalition is fine with having the federal government supply all the money for student loans as long as any lender or loan servicer who wants to stay in the student loan business can get paid for originating and servicing the loan. So the funding piece is the same as the Obama administration’s — the federal government is the wallet — but the number of loan originators and servicers is dictated by whatever the student loan market can bear, rather than being limited to a chosen few selected by the Department of Education.

The alternative plan coalition concedes that eliminating subsidies to private lenders is essential for the process of simplifying student loans. Beyond this inevitability, however, the coalition suggests that there are benefits to maintaining an unlimited number of loan servicers, including a free-market approach to choosing a servicer, minimizing screw-ups that may result from the transition in process, and avoiding regional lay-offs of workers in the loan servicing industry.

Doug Lederman at Inside Higher Ed describes the alternative proposal and the surrounding issues in more detail.

Legislators’ immediate response to the alternative plan was not exactly an enthusiastic embrace of a happy compromise.

The communications director for House Education Committee released a statement saying, “Thus far, President Obama’s proposal is the only plan that will meet both our goals of generating tens of billions of dollars in savings to help students pay for college while creating a reliable, effective and cost-efficient federal student loan program for families and taxpayers.”

It will be interesting to see what happens in this debate over the coming months. Everyone agrees that simplifying student loans is a project whose time has come. But overhauling a system as entrenched and extensive as the federal student loan process requires big changes, and not everyone will agree on who should have to do the changing.